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Ireland: ESRI: State should plan for €2bn budget

Saturday, 14 June 2014   (0 Comments)
Posted by: Author: John Walsh
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Author: John Walsh (Irish Examiner)

The Government should plan for a €2bn budget in October, although the planned water charges and carryover savings from the Haddington Road Agreement should be enough to reduce the fiscal deficit below 3% next year, according to the ESRI’s John FitzGerald.

Under the terms of the bailout programme agreed with the troika, the Government is scheduled to introduce one last austerity budget in order to meet the 3% deficit target next year.

According to the latest Country Specific Recommendations released by the European Commission last week, it urged the Government to proceed with this €2bn figure.

The two contenders for the Labour leadership contest, Joan Burton and Alex White, have both pledged to ease up on austerity.

Mr FitzGerald, speaking at a conference organised by the ESRI, ‘Budget perspectives for 2015’, said if the Government introduced consolidation measures that only included water charges plus the savings from the Haddington Road agreement and retained the pension levy, then on current growth projections that would be enough to reduce the deficit to 2.8%.

But there will be very little room for tax cuts.

If the full €2bn was introduced that would probably reduce the deficit to 2.3%, said Mr FitzGerald. "However, I would not recommend that the government reduces the deficit too far below 3% unless the politicians wanted to do a giveaway budget the following year before the election.”

However, Mr FitzGerald warned that following the decision to scrap the fixed charge for water, revenues next year could be closer to €350m rather than the forecast €500m. This will present huge problems for future governments as revenue will undershoot the level of investment needed for the water infrastructure, he said.

Moreover, another risk to the budgetary arithmetic is further cost overruns in health spending.

Barring a collapse in economic activity, October’s budget should be the last of the adjustment process that started when the economy collapsed in 2008. Mr FitzGerald said the level of adjustment has "been just about appropriate”. If the consolidation path had been slower, as some opposition parties wanted, then the country would be facing another few austerity budgets, which would be very difficult to sell to the electorate, he added.

Under the terms of the Fiscal Stability Treaty, the Government is required to run balanced budgets from 2018 onwards. However, a looming challenge is the current methodology used by the European Commission to determine structural deficits.

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